Lithuanian President Gitanas Nausėda

Linas Jegelevičius for the BNN

If you were this week to flick through pages of Lithuanian print and online outlets, the topic of banking will pop up on top. Lithuania’s Scandinavian capital-based commercial banks SEB and Swedbank are closing their regional branches, cash operations are gone in most bank affiliates, there are fewer ATM machines around, mortgage interest rates in Lithuania are higher than elsewhere and I can go on with the list on local banks’ sins. How to rein in the situation in banking sector?

Public interest must be respected

By establishing a national commercial bank, some Lithuanian lawmakers and economy pundits believe. Others, however, have bristled against the idea.

«I am really in favour of establishing such a bank. But I am afraid the state has already missed the best chance to create it – I mean when the state was nationalising the embattled Snoras bank. Setting up a national commercial bank from scratch would be too costly now,» Povilas Gylys, economist and professor of Vilnius University, told BNN.

«In a civilised Western country, you won’t see preponderance of private interest – there always prevails public interest. Not here in Lithuania, where the local banks do whatever they want and their watchdog, Lithuania’s Central Bank, has closed its eyes on the misbehaving. I am particularly upset that the banks have increased their charges for daily banking operations,» Gylys emphasised. «Establishing a state commercial bank would help tackle all these issues,» he added.

Kęstutis Kupšys also supports the proposal, claiming that a state-owned commercial bank would definitely increase competition in the banking sector.

«In Lithuania we have two and a half banks (Swedbank, SEB and Šiaulių Bankas, the latter is small compared with the first two – L.J.), so we do not have much room for action. We’ve t tried many times to attract other foreign banks but in vain – it seems that our options have been exhausted and the situation is just worsening,» he told BNN.

Idea is not new

The idea of a state commercial bank is not new in Lithuania, but it resurfaced in late October, when the Lithuanian parliament’s Committee on Budget and Finance, which was investigating the circumstances surrounding the 2009 financial crisis, proposed to the government to consider a possibility to establish a commercial state bank.

The Committee also asked prosecutors to newly investigate commercial banks’ role in triggering the crisis and their use of the VILIBOR rate, and the central bank’s alleged failure to properly supervise commercial banks. In April, the Lithuanian government already asked prosecutors to assess the work of financial supervision institutions during the 2009-2010 crisis, including VILIBOR rate violations. Prosecutors decided in August to reject the request to defend the public interest, citing a lack of evidence that the financial institutions supervising commercial banks breached any law.

The Committee also recommended to take steps to reduce the financial system’s dependence on decisions by several parent banks, especially if they are from a single country.

The proposal to establish a state-capital regional bank was on the ruling Lithuanian Famers and Greens Union’s 2016 election agenda. They proposed setting up such a bank on the basis of Lietuvos Paštas (Lithuanian Post), but no action has been taken so far to implement the idea.

President in favour of state commercial bank

Lithuania’s President Gitanas Nausėda weighed in on the proposal only this month, saying that the existing situation in the Lithuanian banking market «makes one to start thinking about the establishment of a state commercial bank.»

«In that respect, I would very seriously think – together with the government – about the establishment of a state commercial bank. In the existing situation, this alternative shouldn’t be a taboo….I think we could start discussions on ways to establish a state commercial bank in Lithuania,» he added.

The Lithuanian government has proposed introducing a 0.03 monthly rate tax on assets exceeding 300 million euros of banks, credit unions and other loan issuers as of next year. Revenue from such a tax is already included into the 2020 state budget bill, estimated to stand at around 50-60 million euros. But the Association of Lithuanian Banks says the proposed tax runs counter to the country’s Constitution and Nausėda, former chief economist of SEB Lithuania bank, also did not embrace the national bank idea, saying that proposed banking asset tax could be moved onto interest rates.

It would be too costly

However, the voices of those opposing the idea of a state commercial bank seem to be much louder for now. Finance Minister Vilius Šapoka believes that creation of such bank would involve huge costs and risks. «There’ve been such banks in Lithuania and we all know very well how that ended…The risks are really high. A decision to create a new state bank would require huge amounts of money,» he said. According to the minister, it is questionable whether a state-run commercial bank could operate sustainably.  «Other countries’ experience shows that such banks often begin to take too much risk and eventually need to be rescued with taxpayers’ money…I believe other solutions can be found without such a risky move,» he added.

Vitas Vasiliauskas, the Lithuanian central bank governor, also said that establishing a state-owned bank would be a costly process, adding that a clear cost-benefit analysis should be conducted before making decisions on this.

Tautvydas Marčiulaitis, partner and fund manager at Milvas, an independent property management fund, slammed the proposal, claiming that such bank would be doomed to loss-making from scratch

«It would inevitably burn the national budget‘s money. Even in mid-term services of such bank would be costlier that those by the existing commercial banks. It obviously would not be a big market player and only after 5 or 10 years since the establishment, it could start making some profit. The idea itself seems very foolish to me,» Marčiulaitis told Lithuania media.

Marius Dubnikovas, chairman of Lithuania’s Business Confederation, also criticised the idea, calling it «dangerous». «Such bank would require huge investments, however its activity can be loss-making, so the state would have to come at its rescue,» he said.